Question

Problem 8-25 Cash Budget with Supporting Schedules; Changing Assumptions [LO8-2, LO8-4, LO8-8] Garden Sales, Inc., sells garden supplies. Management is planning its cash needs for the second quarter. The company usually has to borrow money during this quarter to support peak sales of lawn care equipment, which occur during May. The following information has been assembled to assist in preparing a cash budget for the quarter: Budgeted monthly absorption costing income statements for April–July are: April May June July Sales $ 540,000 $ 1,060,000 $ 520,000 $ 420,000 Cost of goods sold 378,000 742,000 364,000 294,000 Gross margin 162,000 318,000 156,000 126,000 Selling and administrative expenses: Selling expense 103,000 101,000 63,000 42,000 Administrative expense* 46,000 61,600 38,600 40,000 Total selling and administrative expenses 149,000 162,600 101,600 82,000 Net operating income $ 13,000 $ 155,400 $ 54,400 $ 44,000 *Includes $24,000 of depreciation each month. Sales are 20% for cash and 80% on account. Sales on account are collected over a three-month period with 10% collected in the month of sale; 70% collected in the first month following the month of sale; and the remaining 20% collected in the second month following the month of sale. February’s sales totaled $230,000, and March’s sales totaled $255,000. Inventory purchases are paid for within 15 days. Therefore, 50% of a month’s inventory purchases are paid for in the month of purchase. The remaining 50% is paid in the following month. Accounts payable at March 31 for inventory purchases during March total $109,200. Each month’s ending inventory must equal 20% of the cost of the merchandise to be sold in the following month. The merchandise inventory at March 31 is $75,600. Dividends of $31,000 will be declared and paid in April. Land costing $39,000 will be purchased for cash in May. The cash balance at March 31 is $53,000; the company must maintain a cash balance of at least $40,000 at the end of each month. The company has an agreement with a local bank that allows the company to borrow in increments of $1,000 at the beginning of each month, up to a total loan balance of $200,000. The interest rate on these loans is 1% per month and for simplicity we will assume that interest is not compounded. The company would, as far as it is able, repay the loan plus accumulated interest at the end of the quarter The company’s president is interested in knowing how reducing inventory levels and collecting accounts receivable sooner will impact the cash budget. He revises the cash collection and ending inventory assumptions as follows: Sales continue to be 20% for cash and 80% on credit. However, credit sales from April, May, and June are collected over a three-month period with 25% collected in the month of sale, 65% collected in the month following sale, and 10% in the second month following sale. Credit sales from February and March are collected during the second quarter using the collection percentages specified in the main section. The company maintains its ending inventory levels for April, May, and June at 15% of the cost of merchandise to be sold in the following month. The merchandise inventory at March 31 remains $75,600 and accounts payable for inventory purchases at March 31 remains $109,200. Required: 1. Using the president’s new assumptions in (a) above, prepare a schedule of expected cash collections for April, May, and June and for the quarter in total. 2. Using the president’s new assumptions in (b) above, prepare the following for merchandise inventory: a. A merchandise purchases budget for April, May, and June. b. A schedule of expected cash disbursements for merchandise purchases for April, May, and June and for the quarter in total. 3. Using the president’s new assumptions, prepare a cash budget for April, May, and June, and for the quarter in total.

Answer 1

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Garden Sales Inc.
Answer 1
Schedule of expected cash collections	April	May	June	Total Apr-Jun	July	Note
Budgeted Sales Revenue	540,000.00	1,060,000.00	520,000.00	2,120,000.00	420,000.00	A
Cash Sales- 20%	108,000.00	212,000.00	104,000.00	424,000.00		B=A*20%
Credit Sales- 80%	432,000.00	848,000.00	416,000.00	1,696,000.00		C=A*80%
Cash Sales	108,000.00	212,000.00	104,000.00	424,000.00
25% of credit sale in the month of sale	108,000.00	212,000.00	104,000.00	424,000.00
65% of credit sale in the 1st month after sale		280,800.00	551,200.00	832,000.00
10% of credit sale in the 2nd month after sale			43,200.00	43,200.00
Collection of February sales	36,800.00			36,800.00		This is $ 230000*80%*20%
Collection of March sales	142,800.00	40,800.00		183,600.00		This is $ 255000*80%*70%, 20%
Total Expected cash collections	395,600.00	745,600.00	802,400.00	1,943,600.00
Answer 2 a
Inventory Purchase Budget	April	May	June	Total Apr-Jun	July
Cost of Goods	378,000.00	742,000.00	364,000.00	1,484,000.00	294,000.00	D
Add: Closing Stock	111,300.00	54,600.00	44,100.00	44,100.00		E=D*15%
Less: Opening Stock	75,600.00	111,300.00	54,600.00	75,600.00
Inventory Purchase Budget	413,700.00	685,300.00	353,500.00	1,452,500.00		F
Answer 2 b
Inventory Payment Budget	April	May	June	Total Apr-Jun
Inventory Purchase Budget	413,700.00	685,300.00	353,500.00	1,452,500.00		See F
50% Paid in the month of purchase	206,850.00	342,650.00	176,750.00	726,250.00
50% Paid in the 1st month after purchase		206,850.00	342,650.00	549,500.00
Payment for march	109,200.00			109,200.00
Inventory Payment Budget	316,050.00	549,500.00	519,400.00	1,384,950.00

Answer 3
Cash budget	April	May	June	Total Apr-Jun
Opening Cash Balance	53,000.00	40,550.00	59,050.00	53,000.00
Collections from customers	395,600.00	745,600.00	802,400.00	1,943,600.00
Total Cash Receipts	448,600.00	786,150.00	861,450.00	1,996,600.00
Less: Cash Disbursements
Inventory Payment	316,050.00	549,500.00	519,400.00	1,384,950.00
Selling & admin expense less depreciation	125,000.00	138,600.00	77,600.00	341,200.00
Dividends	31,000.00			31,000.00
Land		39,000.00		39,000.00
Total cash disbursements	472,050.00	727,100.00	597,000.00	1,796,150.00
Ending Cash Balance	(23,450.00)	59,050.00	264,450.00	200,450.00
Minimum cash balance desired	40,000.00	40,000.00	40,000.00
Projected cash excess (deficiency)	(63,450.00)	19,050.00	224,450.00	200,450.00
Financing
Borrowing	64,000.00			64,000.00
Principal Repayments			64,000.00	64,000.00
Interest payments (See workings below)			1,920.00	1,920.00
Total effects of Financing	64,000.00	-	(65,920.00)	(1,920.00)
Ending cash balance	40,550.00	59,050.00	198,530.00	198,530.00
Calculation of interest	April	May	Total
Borrowing	64,000.00	-		G
Number of months	3.00			H
rate of interest	1%			I
Interest payments	1,920.00	-	1,920.00	J=G*H*I